Educational Articles

A Spotlight on Activist Investing

Kathryn M. Drew
| April 02, 2014

Activist investors, known for taking large positions in companies where they view room for improvement as a pathway to potential gains, have long been looked upon as corporate raiders out for themselves alone. However, the tone has changed a bit of late, as these major players are becoming a more integral part of the market. Indeed, activist investing has shed much of its negative connotation, as these investors are now shifting more focus onto boosting the overall shareholder value of target companies. And with this changing perspective, the strategy is becoming increasingly more prevalent, with a surge in the amount of capital powering these investors over the past several years.

Some news outlets have called this the “golden age of activist investors”, whereby their influence and presence in the market is growing at a rapid pace. In fact, many view a large stake held by an activist investor as a positive indicator with regard to a company’s investment appeal. Conversely, a divestiture from one of these players may be taken by the investment community as a signal that further upside potential is limited. For instance, after a strong run through much of 2013, shares of Take-Two Interactive (TTWO), the makers of Grand Theft Auto, slipped close to 5% on news that prominent activist investor Carl Icahn had sold his majority stake in the company. Apparently, his divestiture alone was enough to spark a selloff.

But, not all are enthusiastic about the changing tone of activist investors. As noted, these players are increasingly aiming their efforts at targeting firms where they see potential for improvement and then attempting to change the way these companies operate from within. And while this certainly puts them in a better light with shareholders, it can also create tensions with management. While these players view maximizing shareholder value to be of utmost importance, executives commonly argue that the customers come first, putting the two at odds. In fact, while the perception of activist investors has become more positive within the investment community, the companies themselves still view them as a nuisance, capable of interfering with business.

A major story of late has been Mr. Icahn’s interest in tech giant Apple (AAPL). The mogul has been slowly upping his stake in the company, (which now stands at about $3 billion), while throwing critical claims at its Board of Directors. And in the age of social media, he has taken to microblogging site Twitter (TWTR) to express his views, calling for an increase in Apple’s share repurchase program, among other things. This may be good news for Apple investors, who would likely benefit if Mr. Icahn’s efforts prove successful, but it is also a thorn in the side for one of the America’s most notable firms.

Regardless of the different viewpoints on the concept, it appears as though activist investing will only become more prevalent in the market, which has considerable implications for both companies and the investment community. Indeed, these power players are increasingly being seen as market movers, able to make waves with their names alone. For shareholders, keeping tabs on the interests of activist investors may help shed some light on their own holdings, helping investors to make better decisions.

At the time of this article's writing, the author had positions in TTWO and TWTR.